WASHINGTON – America’s gross national debt crossed $30 trillion for the first time on Tuesday, an ominous fiscal milestone that underscores the fragile nature of the country’s long-term economic health as it grapples with rising prices and the prospect of higher interest rates.
The crossing of that threshold, revealed in new figures from the Treasury Department, came years earlier than previously expected as a result of trillions of federal spending the United States has committed to fight the pandemic. That $5 trillion, which funded comprehensive unemployment benefits, small business financial aid and incentive payments, was financed with borrowed money.
The loan binge, which many economists have seen as necessary to help the United States recover from the pandemic, has left the nation with a debt burden greater than the entire economy, surpassing the level of red ink not seen since World War II. seen.
Some economists argue that the country’s high debt burden is not unhealthy, as the economy is growing, interest rates are low and investors are still willing to buy US Treasuries, giving them safe assets to help manage their financial risk. With these effects, the government can borrow money relatively cheaply and use it to invest in the economy.
Still, the numbers come amid renewed concerns in Washington about the country’s fiscal trajectory and its rising budget deficit, which is the gap between what the country spends and the revenue it brings in. Those concerns helped delay negotiations over President Biden’s $2 trillion safety net and climate spending proposal, with West Virginia Senator Joe Manchin III citing “huge debts” as the reason he couldn’t support the legislation.
The ongoing pandemic has slowed the momentum of the economic recovery, fueled inflation rates unprecedented since the early 1980s, and raised the prospect of higher interest rates, which could add to America’s tax burden.
“Reaching the $30 trillion mark is clearly an important milestone in our perilous fiscal trajectory,” said Michael A. Peterson, the chief executive officer of the Peter G. Peterson Foundation, which advocates for deficit reduction. “For many years before Covid, America had an unsustainable structural fiscal path because the programs we designed are not adequately funded by the revenues we receive.”
Understanding inflation in the US
Government gross debt represents the debt of the public, such as individuals, corporations, and pension funds, as well as liabilities that one portion of the federal government owes another portion.
Renewed worries about debt and deficits in Washington follow years of disregard for the effects of major spending. During the Trump administration, most Republicans were no longer fiscal hawks and voted along party lines in 2017 to pass a $1.5 trillion tax cut along with increased federal spending.
While Republican lawmakers helped ramp up the nation’s debt burden, they have since blamed Mr. Biden for putting the nation on a rocky fiscal path by funding his agenda. After a protracted standoff in which Republicans refused to raise America’s borrowing limit, threatening a first federal bankruptcy, Congress finally agreed in December to raise the country’s debt limit to about $31.4 trillion.
In January 2020, before the pandemic spread across the United States, the Congressional Budget Office predicted that gross national debt would reach $30 trillion by the end of 2025. Total public debt surpassed the total output of the US economy last year, a decade faster than forecasters had predicted. The unbiased agency warned last year that rising interest costs and rising health spending as the population ages would increase the risk of a “fiscal crisis” and higher inflation, a situation that could undermine confidence in the US dollar.
The Biden administration has defended the $1.9 trillion pandemic aid package that Democrats passed last year as a necessary measure to protect the economy from further damage. Treasury Secretary Janet L. Yellen has argued that such large federal investments are affordable because interest costs as a share of gross domestic product are historically low thanks to persistently low interest rates.
But that backdrop could change as the Federal Reserve prepares to raise interest rates, which have fallen close to zero since the start of the pandemic, to curb inflation.
The Fed indicated last week that it was on track to raise interest rates at its next meeting in March. Investors predict that the central bank can implement five rate hikes this year, bringing the interest rate to a range of 1 to 1.25 percent.
The Fed has also kept long-term interest rates low by buying government-backed debt and holding those securities on its balance sheet. Those purchases will be finalized next month, and last week the Fed indicated it planned to “significantly reduce” its bond holdings.
Esther L. George, the president of the Federal Reserve Bank of Kansas City, suggested in a speech this week that holdings of large Fed bonds could push interest rates by as much as 1.5 percentage points over the longer term, driving interest rates higher. would almost fall. halved on 10-year government debt. While shrinking the balance sheet risks faltering markets, she warned that if the Fed were to maintain a strong presence in the treasury market, it could disrupt financial conditions and jeopardize the central bank’s prized independence from the elected government. can bring.
As interest rates rise, so does the amount the United States owes to investors who buy its debt. The Congressional Budget Office estimates that if interest rates rise in line with their own forecasts, net interest costs will reach 8.6 percent of gross domestic product by 2051. That would equate to about $60 trillion in total interest payments over three decades.
Frequently asked questions about inflation
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual price change for everyday goods and services such as food, furniture, clothing, transportation, and toys.
“A larger amount of debt makes the United States’ fiscal position more vulnerable to a rise in interest rates,” the CBO said in its long-term budget outlook.
In a recent report, Brian Riedl, a senior fellow at the Manhattan Institute, a conservative think tank, pointed to the CBO’s prediction that the average yield on 10-year Treasuries would rise from 1.6 percent to 4.9 percent over the next 30 years. . . He estimates that if interest rates exceed that forecast by just a percentage point, it will mean another $30 trillion in interest costs during that time.
Mr. Riedl described policymakers who expected interest rates to remain low indefinitely as “hybristic” and said it was risky to assume that low interest rates would keep debt stable over time.
“The economy is unpredictable and we should never take low interest rates and inflation for granted,” Riedl said in an interview.
The interest on the debt could soon become the fastest growing part of the federal budget.
Biden administration officials insist they see fiscal responsibility as a priority. They have promised that their economic agenda will be fully paid for by tax hikes for wealthy Americans and corporations and by stricter tax enforcement. Ms Yellen has forecast that inflation will moderate later this year and return to normal levels as supply chains stabilize.
In recent months, deficits have begun to shrink as a stronger economy boosted tax revenues and slowed government payments of pandemic relief money.
And some economists argue that a more recent economic phenomenon — inflation — may have a bright spot in the sense that it could lift the nation’s debt burden.
Kenneth Rogoff, a Harvard economist, said rising prices essentially dampened the value of outstanding debt and tax revenues rose as incomes rise. He suggested that the markets thus far seemed largely unaffected by the possibility of higher interest rates and that, given the other risks to the economy during the pandemic, the level of government debt was not as worrying as it sounded.
“Obviously you’d rather not be in debt,” Mr. Rogoff said of the $30 trillion total. “But compared to other cases at the moment, that’s not the biggest problem.”